First, before I really get into this post… let me say THANK YOU to those of you who make us look gud!
Being a barber, beautician or makeup artist is awesome. When people leave from being in your service, they feel fresh, renewed and revitalized! It makes us feels like we have our own theme music when we are walking down the street and that is the greatest feeling ever.
And yet, there is a cost to making us look and feel great. There are a lot of things that you must do to provide us with such a service.
Therefore, I want to make sure that you are capitalizing on all that you do and ensure that you are maximizing all of your deductions to make you look good at tax time.
So here is a list of tips to help you make sure that you are deducting all that you are allowed under the law.
Keep impeccable records!
I’ve been in the tax industry for over a decade now and I have seen the tragedies that have occurred as a result of someone in the beauty industry who did not keep pristine records. The impact has been either not getting a refund, or having to pay extremely large balances due.
See, the thing is, the beauty industry is majorly a cash based business, so there is certain level of mistrust from the IRS. So there is a lot of “trust but verify” happening when it comes to the beauty industry and taxes.
Also, when it comes to mistrust, because the beauty industry is a majority cash based industry, it’s easily replicated for the purpose of creating fraudulent tax returns. So you can see why you will need to do your due diligence and keep records to prove that you are one of the good ones!
Keeping good records doesn’t have to be fancy nor does it need to get expensive.
For the beauty industry, you would keep track of the income and expenses the same as everyone else, but I will err on the side of caution and add just a little more detail especially if you are working out of your home as opposed to a shop.
If you don’t receive a 1099-Misc for your services, then I would suggest that you keep a ledger that includes:
The ledger can be anything as long as it can be produced for evidence. It can be a .99 cent notebook, a 3 ring binder, an Excel sheet or whatever, so long as all of the important information is there. And of course, if you can afford it, there is always the bookkeeping and accounting software.
Identify items that has a business purpose.
Here is where it gets fun!
There is an old saying that states: It takes money to make money. There has never been a more truer statement made in the world of business. And I know that sometimes there are things that tend slip our minds because they just don’t seem that obvious.
When it comes to deductions and write-offs, the only thing we need to concern ourselves with is: does it have a business purpose?
It has a business purpose if it is an “ordinary” and “necessary” expense. Ordinary meaning that it is a common item that is used by a majority in that industry and necessary meaning that it is required to do the job.
Look around your work space and write down everything you see. Then ask yourself is it ordinary and necessary. If it is – it’s deductible.
But, again, I know some things aren’t that obvious, so let me give you some examples:
Can you see where I’m going with this list? I didn’t want to list every single item I could think of, but I did want to kick-start your brain.
Something for those who work from home.
A word of caution… If you so choose to deduct this one, do so with caution.
Now I’m not trying to scare you out of taking this deduction, I am, however, telling you that if you do take this deduction that you must do so with precision.
This deduction won’t necessarily get you audited, but it is one of those deductions that is looked at the most by the IRS because of the amount of misunderstandings surrounding it that causes a lot of erroneous deductions to be taken.
But you don’t you worry at all… your favorite uncle/cousin has got you covered.
Let’s take a dive into the rules for Home Office Deductions.
First and foremost there are two words that you must understand when it comes to the home office deduction and they are:
Regularly and Exclusive.
In order to use the home office deduction, you must and I mean must… use the area of the home that you are deducting BOTH regularly and exclusively.
So what does these words mean exactly?
Regularly means that the space designated as “business use” is use more than just occasionally. I’ll be honest with you, there is no specific definition that constitutes regular use, therefore, each case will be assessed based on the facts and circumstances.
Exclusively does have a specific definition. It means that there can be absolutely no personal activities taking place in that space – period. If any personal activities are found to have taken place in that space, your entire home office deduction will be disallowed.
So if you are performing your services in the kitchen or living room area, then you would not qualify for this deduction. On the other hand, if you have a big enough area or space where you can clearly identify that area or space as 100% business use, like a partition, then you could claim that area/space.
Additionally, if you converted a separate structure like a garage or something similar into your work space, that would count as well as long as it met the rules.
Once you have determined that the space is used both regularly and exclusively, the next step is to determine what is called the business use percentage of the area used for business. This is figured by dividing the square footage of the home office or space by the total square footage of the entre home.
For example: let’s say that you have a home that is 1000 sq. ft and the area used for business is 120 sq. ft. The formula would be this: 120 ÷ 1000 = 12%.
Therefore, we can deduct 12% of the total cost of the household expenses (rent, mortgage interest, property taxes, insurance, utilities, internet, etc).
Additionally, if there were any expenses that were incurred as a direct result of the home office space, like a repair made to a wall in the home office, a paint job in the home office only… that is considered to be a direct expense and is 100% deductible.
With the Simplified Method, all you need to do is measure the square feet of the home office area and multiply the result by $5. The answer will be your deductible amount. There is a max limit when you use this method, however, and it is 300 sq. ft. or $1,500.
Using the same numbers from the above example it would look like this:
120 sq. ft x $5 = $600 deductible amount.
There are some other rules that may come into play when using this deduction, but they are beyond the scope of this post. If you which to read about them you can read the instructions for the form 8829 or enroll into the self-employed tax course. Hint: the tax course is funner!
Report your tips.
You make us look and feel good and for that we like to give a little something extra. But that extra is not free – it’s taxable.
When it comes to tips, we primarily think of those in the restaurant industry, but tipping is customarily in almost all service industries. Remember, when dealing with cash, you are under a little more scrutiny than most.
I personally know of someone who had worked in the service industry for years and collected a lot tips throughout the years, yet never reported them.
Well, one day a few years later, the IRS had finally caught up with him. The result: he ended up paying tens of thousands of dollars.
It’s quite logical really. The IRS did an audit on the industry which affected the individual. Meaning that the IRS looked at the industry as a whole and found out that statistically, everyone who worked in that industry received tips in excess of their gross earning.
They then looked at what the average tip amount was annually, and asked everyone in that industry to either report their tips or prove that they did not in fact get any. Another reason why keeping impeccable records is important.
Again, there is nothing special to do to report your tips… just add it to your gross income. I would suggest, however, for purposes of proof, that you add a line in your ledger that Identifies that income as a tip.
And that is it.
3 tips to help you look at tax time in the same way you make us look good daily. I hope that you find them to be helpful.